Much like how a perfect storm is the result of the convergence in one point three adverse atmospheric fronts, strengthening and convergence in recent months has begun three important trend of the world economy:
- The slowdown in the Chinese economy and in parallel with the growth of the financial instability in its shadow banking system;
- The collapse of emerging market currencies (India, Brazil, Turkey, South Africa, Indonesia, etc.) and their economic slowdown;
- Continuing in the economies of the Eurozone's drift toward deflation, the head of which are the problems in Italy and economic stagnation, and burn in France, the second largest Eurozone economy.
Besides the problems in these three critical areas of the global economy have started to feed each other.
Despite tens of trillions of dollars, wityh in the global economy since 2008 by Central banks in the US, UK, Europe and, most recently, Japan, all over the world are experiencing a decline in investment activity aimed at creating real jobs. Massive injections of liquidity (money) by Central banks or under the bridge on speculation in global financial markets (stocks, bonds, derivatives, futures, options, foreign currencies, funds and various financial instruments) based on the cash balances of Bank and non-Bank corporations, being hidden away in dozens of offshore tax havens from the Cayman Islands to the Seychelles, or were invested in emerging markets like China, India, Brazil, Indonesia, Turkey and other places.
The main beneficiaries of this policy on the creation of money by Central banks have become very wealthy investors global financial institutions and global corporations in General.
According to a study of 2013 global consulting company Capgemini, for 2012 alone, very wealthy investors have increased their investments are suitable to wealth on $ 4 trillion, with a further projected increase asset value in the coming decade will be 4 trillion dollars a year. From 2008 to 2013, the main financial institutions that invest in their interests – the so-called "shadow banks" (i.e. hedge funds, private equity firms, asset management and dozens of other unregulated in global financial institutions) – at least doubled its total assets, and is now in their hands worldwide is more than 71 trillion dollars suitable for investment of assets.
This massive accumulation of wealth of the global Finance capitalists and their institutions occurred in speculating and investing in the opportunities provided by offshore financial and emerging markets. Specified became possible thanks to the trillions of dollars, pounds, euros and yen provided according to the policy of Central banks at little or no cost since 2008. That is, until 2014.
This mass in the tens of trillions of dollars, diverted from the US, Europe and Japan on the so-called "emerging markets" and China is now beginning to flow away from emerging markets in "West".
Accordingly, the focus of the global crisis, which in 2008 first broke out in the United States and then, in the period between 2010 and early 2013 have shifted to Europe, now in turn is again shifted for the third time. Financial and economic instability now arises and increases in offshore markets and economies and its probability in China is also growing.
The growth of financial-economic instability in China
Before the global financial crisis and the 2008 recession, China's economy grew by 14 percent per year. Today the figure is 7.5 percent with a high probability of further slow growth in 2014.
In 2008, China initially slowed economically, but recovered quickly and by 2009 grew even faster – unlike the USA and Europe. A rapid recovery was due to China's massive fiscal stimulus in the region of 15 per cent of its GDP, which is 3 times higher than the amounts comparable stimulus in 2009 in the United States. Specified fiscal stimulus focused on direct public investment in infrastructure, unlike the U.S. stimulus in 2009, which was mostly based on grants to States and tax breaks to businesses and investors. In addition, in 2007-2008, China was not yet worthy of attention to the problem of global shadow banks. Therefore the policy of monetary expansion, which he introduced together with the stimulus, helped his rapid recovery by 2010.
However, since 2012, China is facing a growing problem of global shadow banks that destabilize the real estate markets and municipal debt. Thus, since 2012, a distinct sign of slowing and shows non-financial sector of the Chinese economy, including its manufacturing and export sectors.
From the financial side, total debt (public and private) in China rose from 130 percent of GDP in 2008 to 230 percent, and the share of shadow banks has grown by 2013 to 25 percent in 2008 to 90 per cent of the total numbers. Thus, the share of shadow banks in the total debt has almost quadrupled and represents nearly all of the increase in debt as part of GDP since 2008. Therefore, shadow banks were the driving force behind the growing problem of municipal debt and found financial volatility.
Most of this increase in debt was sent in a bubble local real estate and municipal debt bubble support, as the local administration brought to the limit of the possible housing, loans to new enterprises and local infrastructure projects. In 2011, the value of the municipal debt was estimated by the Central government of China in the amount of 1.7 trillion dollars. According to some estimates, in just 2 years he exceeded $ 5 trillion. Most of this debt, everything else is short term in nature. So it is very unstable, susceptible to unexpected defaults, and can potentially unbalance a broader segment of the financial system of China is in many respects like subprime mortgages did before in USA.
Inflation of arrears to the private sector suitable now in China to a critical extent. There can easily happen a major event, capable in case of default of the Bank or financial product cause global instability. In a sense, China's situation today more resembles the American housing construction, as well as the markets for government and municipal debt in the U.S. year in 2006.
In short, China is approaching its own "Lehman moment". In fact, it almost happened a couple of months ago with the financial trusts in China. Fearing a potential default of China Credit Trust and its distribution, the Chinese Central government at the last moment was saved by investors. According to Wall St. Journal, this event "lays bare the weakness of the shadow banking system that grew after 2009."
The increase in financial instability in local Chinese markets is, thus, a major potential problem for China and for the global economy, so the slowdown in 2014 and began in China and in the world. In early 2013 the Chinese authorities have realized the growing problem of shadow banks and bubbles in its local housing markets and investment. By 2013, the speculators drove the housing prices in major cities of more than 20 per cent up, compared to the more or less stable 3-5 percent inflation in the real estate market in 2010. Therefore, in may-June 2013 the Chinese leadership tried to rein in shadow banks, reducing credit throughout the economy. But it has caused a serious slowdown in other sectors of the economy in the spring of 2013. Then again politicians quickly returned to the cash tap and added another benefically incentive support package swaying in the economy. These incentives expected public expenditure on transport infrastructure, reduction of export costs of business and reducing taxes for smaller businesses. The economy recovered in the second half of 2013.
By early 2014, judging by appearances, once again began to inflate the housing bubble, while the real economy with the same success once again showing signs of slowing down. In early 2014, again the impression that China's leadership intends to suppress their shadow banking and housing bubble this spring 2014. It will probably mean another policy-induced slowdown in the Chinese economy, similar to what occurred a year earlier, in the spring of 2013. But that's not all. Financial instability and the economic slowdown that will cause a collision with this instability, superimposed by a number of other factors that contribute to a further slowdown in the Chinese economy in 2014.
In addition to recent fiscal stimulus measures of the economy and its overheated housing markets, another important source of economic growth is the industrial sector, and in particular, production for export. And he also slows down. The reasons for the slowdown in industry and export are both rooted in domestic developments of the Chinese economy and the problems in the Eurozone and emerging markets.
China is experiencing wage growth and a deterioration of exchange rate of its currency, the yuan. In both cases, increasing production costs and, in turn, reduces the competitiveness of its goods exports. The cost increase leads even to the Exodus from China of the world's transnational corporations heading into even more cheap in terms of cost economies like Vietnam, Thailand and other countries.
The majority of China's exports go to Europe and to emerging markets, not only in the United States. And as seen in the emerging markets, their demand for goods and the export of Chinese production falls. Conversely, as the China economy slows down, it reduces its imports of materials, semi-finished products and raw materials from developing world markets (as well as key markets like Australia and Korea).
Similar trade-related effects occur between China and the Eurozone. China, in fact, constitutes for Germany the largest consumer of its exports, even bigger than the rest of Europe. Therefore, if China slows, it will require fewer exports from Europe, which will further slow down the already stagnant economy in the Eurozone. Similarly, the stagnation of Europe means lower demand for Chinese goods, and thus, a further slowdown in China. In other words, the internal China's slowdown will deepen the stagnation and deflation in Europe, and will contribute to even more abrupt slowdown of the economy, what is happening now in the world of emerging markets.
The slowdown also will follow the state policy aimed at the structural shift in the economy toward greater emphasis on consumption. The specified shift towards consumption seriously will start by the end of the Congress of the Communist party in March 2014. But consumption in China represents only 35 percent of the economy (unlike 70 percent in the U.S.), and public investments in China far exceed 40 percent of GDP. And it is unlikely that consumption can grow faster enough faster to offset the reduction in investment, at least at first.
Thus, the slower growth in this key economy in the world by a magnitude of almost 10 trillion dollars a year, indicates a long list of inevitable big events. What happens in China, the second largest economy in the world, has provided and will continue to have a significant negative impact on an already slowing emerging markets and a chronically stagnant Eurozone. At least as interesting as the beginning of a global perfect storm answer the American economy. But given the data pointing to a slowdown in U.S. housing construction, production, creation of new jobs, automotive and other retail sales, reduce the real median income of families and the real possibility of further price hikes on food and gasoline in the coming months, emerging in the sea "perfect storm" does not Bode well for the fragile American economy no good now in the fifth hour of economic recovery in "stop-go" level is below average.
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